We all know what is bank fixed deposit. In this article I will present an introduction to FMP or Fixed Income Plan, comparison between FMP and Bank Fixed Deposit and what are the benefits of investing in fixed deposits.
What is FMP or Fixed Income Plans?
FMPs are closed ended mutual fund scheme with a maturity period ranging from a few days to five years. Most of the FMP plans are debt oriented. But a few scheme may have a small equity component. At the end of the period, the scheme matures, just like a (Fixed Deposits Investment, fixed deposit in a bank. FMP schemes have two options. With growth option or with dividend options.
Do FMP provides a guaranteed return?
No, they do not. But investors are informed an indicative return at the maturity. If you select a FMP, which invest only in debt instruments, more often than not, the actual return will match with indicative return.
What is the difference between FMP and Bank FD?
Practically, for an investor, there is no difference. Only difference is that bank FD Investment in India gives an explicit guarantee on return, where as in FMP, return is indicative. In terms of tax friendliness, FMP are more tax friendly than Bank FD ( see the table below ).
Invested Amount - Rs 100 - Rs 100
Return% -10% - 10%
Investment Tenure - 1 year - 1 year
Interest Earned - Rs 10 - Rs 10
Tax on Interest Earned - Rs 1.416 - Rs 3.4
Net Interest after Tax - Rs 8.6 - Rs 6.6
12.5% Dividend Distribution Tax + 10% Surcharge + 3% Cess = 14.16% *30% Tax (for income over 10 lakhs) + 10% Surcharge + 3% Cess = 34%
Dividend Options or Growth Option - Which one I should go for?
It depends upon the investment options in India. For less than one year investment, dividend option is better. For a less than one year maturity period, you pay 14.16% tax, deducted at the time of distribution of dividend. For more than one year, growth option is beneficial. In case of more than one year, you need to pay 10% as capital gain tax (without indexation) or 20% tax (with indexation). You can also avail the benefit of double indexation by investing in Fixed Deposits or in march of a financial year and redeeming the units in April in next financial year ( say - purchase in March'09 and redemption in April'10 ). In case of double indexing, tax liability is further reduced.
Conclusion: If you are doing Investment in Fixed Deposits of small amount in Banks or Post Office for the purpose of saving, then do not look at FMP. But if you are looking for a considerable amount of benefits for fixed Deposits 2021 and also looking for tax efficiency, then go for FMP. FMP is primarily helpful for people in higher tax bracket. Higher your tax bracket, more you should move your fixed investment towards FMP. I would request , next time you think of an fixed deposit india, do your quick calculation and then take a decision.
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